Social Welfare Analysis of the Stock Price Bubble

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Abstract

We investigate how large is the social benefit (or cost) of the stock price bubble formulated by Olivier (2000). We consider three types of the bubble: continuous non-self-fulfilling bubble (CNB), and temporal non-self-fulfilling bubble (TNB), and self-fulfilling bubble (SB). Under the condition that utilities of all generations are evaluated almost equally we show that (ⅰ) the existence of CNB improves the social welfare and its extent is equilvalent to subsidizing (gB - g0) / gB (>0) rate of a wage income to all generations in the bubbleless economy (where g0 and gB are the growth rate of the economy without bubble and with bubble, respectively), (ⅱ) the welfare property of TNB is neutral in that the social welfare level of the economy with TNB is exactly equal to that of the bubbleless economy, and (ⅲ) the existence of SB harms the social welfare and its extent is equilvalent to imposing (g0 - gB) / gB (>0) rate of a wage income tax to all generations.

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